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FAs Should Prepare Clients As Pensions Face Cuts

January 3, 2017

Many public and private pension plans have been underfunded in recent years and financial advisors need to help their clients make contingency plans, the Wall Street Journal writes.

In the public pension sphere, Detroit is a prime example of what can happen to people who have come to rely on pensions for retirement, Walid Petiri, owner and chief strategist of Financial Management Strategies, tells the Journal. Following the city’s bankruptcy filing in 2013, Detroit’s retired general-service workers saw cuts in their monthly pension checks, he writes. Meanwhile, many private pension plans are underfunded and fewer people are enrolling in them, according to Petiri.

Examining the funding of a pension is the first step for an advisor whose client plans to heavily rely on a pension, he writes. So if a pension is only 85% funded, for example, the advisor should help the client devise a way to replace 15% of the income in other ways, according to Petiri.

The next step is to examine a client’s liabilities and determine how a cut in their pension would affect their projected expenditures, he writes. This is also a time to consider reducing future liabilities.

Clients facing mortgage and other debt payments may want to pay them down instead of adding more to their investments, for instance, according to Petiri.

Understanding liabilities is particularly important for clients who are close to retirement, he writes. With younger clients, meanwhile, the advisor can instead focus on ensuring that the pension isn’t their only source of retirement income, according to Petiri.

By Alex Padalka
  • To read the Wall Street Journal article cited in this story, click here.